People's Democracy

RURAL CREDIT

RBI Paper Explodes Govt’s Inclusion Claim

Konduri Veeraiah

WHILE releasing the progress report of UPA-2, the prime minister claimed that the growth process in India over the last decade has been more inclusive. Of late the policy documents of the government, including the finance minister’s reply to the debate on allowing more private banks, also harped on financial inclusion, which means access to formal sector financial services for all sections of the people. Apart from increasing the number of bank accounts or branches in proportion to population, another criterion to judge the extent of financial inclusion is the share of funds borrowed by the rural poor from formal financial institutions.

FINDINGS BELIE

GOVT’S CLAIM

But recent revelations from different sources — like the RBI’s working paper, 2009-10 survey of employment by National Sample Survey Organisation, and the Census 2011 — belie the government’s claim. The research conducted by the Reserve Bank of India confirmed the fact that nearly half of India’s population is excluded from the institutional rural credit market. This is also corroborated by the recently released NSSO data. Authenticating the criticism coming from the Left, these reports conclude that the so called reforms have  by and large excluded the rural people from the institutionalised credit facilities. This is one of the key components in the structure of poverty as identified by the Human Development Report 2013.

The RBI’s working paper titled “Persistence of Informal Credit in Rural India: Regulatory Policies Need to Recognise Changing Landscape” clearly states that informal credit channels that were getting pushed to the back between the 1970s and the 1990s are now playing a key role in the rural credit market. In contrast to the claims about financial inclusion, the paper concludes that two-fifths of rural households still depend on informal credit which “indicates further scope for financial inclusion in rural India.” Institutional credit rose from 29. 2 per cent in 1971 to 61.2 per cent by 1991, but then started declining after it. Similarly, the non-institutional rural credit which slid down to 38.8 per cent in 1981 from its peak 92.8 per cent in 1951, started to shore up after the ‘reforms.’ This clearly indicates that the ‘reforms’ process has excluded a majority of the population from the institutional credit sources. The informal credit delivery channels gradually declined during the 1960s and very nearly broke down during the 1970s. That was the high time in terms of public policy when banks were  nationalised with a mandate to expand their rural coverage and widen their ambit of priority to include agriculture and allied activities. This was extended to providing credit facilities to other forms of livelihood sources by bringing them under the ambit of rural institutional financing. (See Table I below.)

TABLE I

Institutional and Non-Institutional Rural Credit

                                                                                                  (in percent)

Similarly, the banking statistics released by the RBI also confirms the understanding. There is no doubt that the banking network tripled after the banks nationalisation and adoption of development banking. At the same time, mere expansion of banking network does not suffice to meet the goal of inclusion in terms of lending from formal banking channels. When we consider this, we get to understand that even after the nationalisation of banks and expansion of bank branches, these primarily worked as channels for mobilising capital from rural households instead of infusing the much needed liquid credit into the rural economy. (See Table II below.)

TABLE II

MONEYLENDERS

STILL FLOURISHING

In recent years, policy interventions have indeed led to a doubling of agricultural credit but the limited access of small and marginal farmers to institutional credit continues to be a matter of concern. Even now the non-institutional rural credit is being administered by three channels — landlords, rural moneylenders and professional moneylenders; all of which are the informal credit sources. After nationalisation of banks in 1969, a package of policies and initiatives ensured that the share of moneylenders in rural credit fell from 61.7 per cent in 1951-61 to mere 20.9 per cent by 1981 and further to 19.7 by 1991. Despite the fact that the country witnessed a rise in rural banking and state aided, supported and financed instruments of financial inclusion such as cooperative banks, NABARD and bank branches whose primary responsibility is to take care of the cultivators’ needs in their specific areas, moneylenders  not only persisted in rural India but their operations also experienced enormous expansion. The available data reflect the stagnation in rural banking with the onset of economic ‘reforms,’ particularly after the banking sector liberalisation. In the post-1991 era, the banking sector deviated from the development banking mandate and reverted back to maximising its profits. To ensure this, public sector banks started trimming their rural branches and staff to reduce their overheads. This is revealed by the 2002 AIDIS survey which concluded that 43 per cent of rural households continue to rely on informal finance. The situation today is that 15 out of the major 21 states have witnessed a fall in institutional credit.

What is worrying is that the proportion of farmers taking such loans has been increasing and they have more than four-fifths of the operational holdings, thus indicating that nearly 80 per cent of small and marginal farmers are far from accessing the institutional credit to meet their needs. This, the RBI paper concludes, is due to the inadequacy of the credit received from formal institutions, that too not at the time of need, and with a lot of procedural hassles. 

The data also indicate that despite a considerable expansion of the scope of priority lending and an enormous expansion of financial services sector, there has been an increase in the number of private players, both foreign and domestic.

During the winter session of parliament, when the government pushed through a bill to facilitate the corporate houses opening banks, the finance minister told the house that these steps would help expand and deepen the web of branch network, based on which the government intended to achieve its objective of financial inclusion. But the RBI paper says that a mere increase in the number of branches and of financial services does not automatically translate into financial inclusion. Table II clearly shows the gaps between deposits from and credit outflows to the rural economy, thus validating the criticism that nationalised banks treated rural India primarily as a source of deposit mobilisation more than an area needing credit disbursals expansion. Thus one of the reasons for continued dependence on money-lenders, as identified by the RBI, is that formal credit delivery structures have not fully stretched their penetration to villages.

DEFECTIVE

UNDERSTANDING

The RBI paper repeatedly refers to formal credit as the flow of financial products in the country’s formal financial system. But here lies a point. The RBI treats all institutionalised lending, both private and public, as formal credit. But these also includes the micro finance institutions, thrift groups and chit fund companies like the infamous Sarada company that wrecked the life of rural poor under TMC rule in West Bengal. Similarly, though the RBI treats the so called micro financing as a formal channel, one cannot really equate it with formal nationalised banks. If we consider these two sources of rural credit — chit funds and MFIs — as non-formal channels, the percentage of rural poor depending on such channels goes close to 90 per cent.

One more important aspect has to be taken into consideration. Since the beginning of the ‘reforms,’ the rural credit market has changed. Till 1991, the credit market has been primarily linked to the productive credit which is channelled to farmers in the first instance. With the central government bringing certain other welfare measures such as financing self-employment and establishing finance development corporations for the SC, ST, BC and other groups, rural credit has gradually shifted to non-farm sources of employment. At the same time, the infusion of liquid capital into the rural economy took a beating in the ‘reforms’ period. But as the state finance for rural livelihood sources dried up, it created scope for a revival of the informal, non-institutional credit channels, with the people resorting to these sources to meet their contingent requirements. That is why we find the rural labour borrowing from moneylenders, still at the level of 1999, despite the opening of private banks in large numbers and the mushrooming of MFIs across the country. Thus recent developments in financial sector have strengthened the division in which asset owning classes are garnering institutional credit in rural India whereas non-asset owning classes are left at the mercy of the private, informal channels of rural credit. This is resulting in distress situations of the kind debtors in Andhra Pradesh are experiencing.